EMEA Morning Briefing: Stocks to Rise Following Wall Street’s Latest Records

MARKET WRAPS

Watch For:

No major data expected.

Opening Call:

European stocks should climb at open and U.S. stock futures point higher. Dollar strengthens. Treasury bonds tumble. Oil and gold rise.

Equities:

European stocks are set to open higher after U.S. stocks climbed to records Monday after President Trump signed a Covid-19 aid bill, averting a government shutdown and ending uncertainty about the rollout of the spending package.

Mr. Trump’s signing of the $900 billion bill paves the way for the government to make direct payments to American households as the surging coronavirus pandemic continues to disrupt business and social activity. Investors expect that the additional spending will help cushion the economy amid restrictions put in place by states and local authorities to manage Covid-19’s spread in the winter.

“Economically speaking, it is a major support to bridge over this difficult winter period,” said Hani Redha, a multiasset portfolio manager at PineBridge Investments. “The market is going to still be in a constructive mood.”

Travel stocks were among the biggest gainers in the market Monday. Many such companies have been hit hard by restrictions tied to the pandemic, making them look especially cheap to investors.

Meanwhile, technology stocks took a step back, with Zoom Video Communications sliding 6.3% and Chewy falling 11%. Despite Monday’s moves, shares of companies focused on e-commerce, online communications and at-home entertainment have been among the best-performing stocks in the market this year, a testament to how consumer behavior has changed due to pandemic-related lockdowns.

Sentiment in Europe was buoyed after the European Union began distributing Covid-19 inoculations Sunday. Just days earlier, the EU reached a post-Brexit trade agreement with the U.K., bringing an end to years of uncertainty about future relations between the two sides.

“Every day that is going by, we are removing uncertainties more than we’re adding them,” Mr. Redha said.

Japan’s Nikkei 225 index breached a nearly 30-year high, helping to staunch uncertainty as governments reimpose pandemic-fighting travel and business curbs that threaten to weigh on global economic activity.

In Tokyo, the Nikkei 225 jumped 1.6% to 27,292.37, the first time it has traded above 27,000 since April 1991. The market hit its all-time peak close of 38,915.87 on Dec. 29, 1989.

Trading is thinning as tumultuous 2020 draws to a close. But after nosediving in March as the pandemic took hold, share prices have more than recovered, helped by massive infusions of central bank cash and ultra-low interest rates, which make shares potentially more lucrative than other investments.

Investors have gained confidence with the rollouts of coronavirus vaccinations they hope will pave the way for a return to normal activity in coming months.

Looking forward, analysts say trading volumes are likely to remain thin this week, with many investors and traders taking time off in the year-end holiday period. Markets in the U.S. will be shut Friday in observance of New Year’s Day.

Forex:

The U.S. dollar strengthened 0.6% against the euro and 0.3% against the yen, while the WSJ Dollar Index inches nearly 0.1% higher since the dollar was mixed against other major currencies.

TD Securities said it will look to sell sterling on rallies in 2021 as relief from the U.K.-EU trade deal fades and the harsh economic reality of Brexit becomes apparent.

“While GBP is very cheap across many of our valuation models and much of the negotiation-linked uncertainty can fade, there is still significant economic underperformance and disruptions to follow early in 2021,” TD said in a note. “We start the year looking to sell GBP on rallies, especially on the non-USD crosses.”

Overall dollar weakness may help GBP/USD “drift higher” through the year but TD doesn’t expect sustained gains above current levels until the second half of 2021.

Bonds:

A risk-off mood sent Treasury bonds tumbling, with the benchmark 10-year yield rising to 0.953 from 0.933% on Thursday.

The bulls were riding on Trump’s approval of the stimulus bill. Investors are also increasingly seeking inflation protection, with the spread between the 10-year Treasury and the inflation-protected 10-year TIPS approaching 2%.

Spartan’s Peter Cardillo said part of the bullishness may stem from usual end-of-quarter portfolio adjustments as concerns over the economy ease.